Everywhere in the world, inflation is now part of our daily lives. Is it possible to protect against this with cryptocurrencies? What are their advantages? We look at purchasing power and crypto-assets in this exclusive file.
1. Inflation: what is it and why protect against it?
Inflation is a gradual decrease in the purchasing power of a currency. As a result, the prices of goods and services become higher. Inflation is multifactorial but is often based on the amount of money in circulation.
Historically, man has looked for safe havens, which allow him to protect himself from inflation. These are assets or goods that tend to keep their value or increase it. The best known is gold: a safe haven par excellence, it was chosen to guard against the loss of value of fiat currencies.
Commodities are also historically seen as bulwarks against inflation. Grains, precious metals, electricity, and other products necessary for human life are considered essential, and therefore factors of stability. And in recent years, it’s cryptocurrencies like Bitcoin (BTC) have started to be touted as another bulwark against inflation.
2. Bitcoin: an asset originally created to hedge against inflation
To understand where this comes from, we have to go back to the history of cryptocurrency, and Bitcoin in particular. The largest cryptocurrency was created following the 2008 subprime crisis. Satoshi Nakamoto, the mysterious creator of Bitcoin, communicated at the time about his distrust of an overly centralized system that led to this disaster. He thus explained that fiduciary currencies, managed by central banks, did not allow the consumer to have confidence.
Hence a solution considered by Nakamoto: Bitcoin. The largest cryptocurrency has been designed as a trusted system that does not require the approval of centralized entities. Other mechanisms have also been put in place to guard against inflation and limit risks.
Bitcoin has a supply limited to 21 million coins: its rarity thus theoretically allows it to be in demand, and not to be “diluted”. From there to see it as a bulwark against inflation and a way to preserve purchasing power, there is only one step. But is this really the case?
3. Can we preserve our purchasing power thanks to cryptocurrencies?
The question that arises is, therefore: can we protect our purchasing power with cryptocurrencies? We interviewed Odile Lakomski-Laguerre, lecturer in economics at the University of Picardie-Jules-Vernes. According to her, Bitcoin was created by computer scientists, not economists, and it shows:
[The creators of Bitcoin] remained on the surface on the main argument of [the economist, editor’s note] Friedrich Hayek, who said that by removing the banking system and the central bank, that would be enough to eliminate inflation.
In fact, it is more complex, largely because to serve as a bulwark against inflation, Bitcoin must be more widely adopted, again according to Odile Laguerre:
The notion of inflation means that the currency loses its value relative to the goods and services it allows to buy. […] So as long as cryptocurrencies do not make it possible to constitute a payment zone in which we would pay for everything in crypto, and where a large part of the prices would be expressed in Bitcoin for example, it makes no sense since the notion of inflation does not exist.